Increased costs will not necessarily lead to major revenue problems

Published on
May 3, 2022

However, there are large differences between businesses and sectors in the extent to which they are confronted with higher costs, their ability to adjust their operations to respond to these costs, or the extent to which they will benefit from an increase in sales prices. The development of farm revenues over the rest of the year will depend greatly on the development of sales prices. These developments will need to be monitored closely.

This is the conclusion of an exploratory study on the possible effects of the war in Ukraine on revenues in the agricultural and horticultural sectors by Wageningen University & Research (WUR). The study was commissioned by the Ministry of Agriculture, Nature and Food Quality. Since the start of the war in Ukraine, the costs of energy, fertilizers and cereals (both for animal and human consumption) have risen sharply for many agricultural and horticultural businesses. In fact, the costs of fertilizer and energy had already started rising steeply before war broke out.

Exploratory study

The study looked at costs, sales prices and the effects on farm revenues in the primary agricultural sectors of the Netherlands in the first three months of 2022. It is as yet unclear how much farmers’ costs and their sales prices will fluctuate during the rest of the year. The affected agricultural sectors will need to be monitored closely to form a clearer picture of how farm revenues will develop in the future.

Revenues under pressure

Because the production of the Dutch agriculture, horticulture is dependent on these raw materials, rising costs have an impact on both production costs and revenues. WUR’s exploratory study, which analyzed the effects of rising costs up to and including March 2022, reveals that higher prices will need to be commanded to compensate for these costs.

Cost increases versus yields

The costs of mixed feed, fertiliser, agricultural contractors and energy had already begun to rise in 2021. The war in Ukraine and the sanctions on Russia and Belarus have pushed costs up even further. For example, compared to 2021, the average cost of feed has increased by 20%, fertiliser by 130%, agricultural contractors by 5% and electricity and gas prices by 60%. However, in addition to these increased costs, several sectors also saw an increase in sales prices in the first quarter of 2022 compared to last year’s average.

How well businesses can cope with setbacks also depends on what their financial situation was before the war, and whether they have built up stocks and made price agreements with suppliers or customers. Businesses that did not or could not take such measures face significantly higher production costs.

For this study, scenario analyses were conducted to calculate the consequences of these changes. The analyses assume several interrelated developments that will affect the costs of the affected sectors and businesses during the coming year and resulted in a basic scenario, an optimistic scenario and a pessimistic scenario. The study covered the arable, horticulture, dairy, pig and poultry sectors.

Revenue expectations

In all five sectors, to achieve the same revenues as in 2021, or the average over the last five years, sales prices will need to increase by about 15-20% to compensate for rising costs.

Arable farming: The higher costs are currently more than compensated in all scenarios by the high prices being commanded for feed wheat and potatoes for human consumption. No major loss of revenues is expected here.

Greenhouse horticulture: After the sanctions, sales prices fell while costs continued to rise. Revenues will continue to fall in this sector. Yields will probably be insufficient to offset the costs during the rest of the year.

Dairy farming: The milk price has increased by 20% compared to 2020. If the price stays at this level, the yields will compensate for the higher costs.

Pig farming: At the end of March, the prices of fattening pigs and piglets had increased by 18% and 35% respectively compared to the average prices in 2021. If these prices remain stable, they will more or less compensate for the higher costs in the pig farming sector in all scenarios (up to the low level of 2021). However, pig farmers will not see their revenues improve; prices will need to be raised higher to achieve revenues equal to the average over the last five years.

Poultry farming: On average, yields from eggs and poultry meat are expected to more than compensate for the increased costs.

There are, however, large differences between individual agricultural businesses. Among other things, the effect of increased prices on revenues is determined by agreements and contracts with suppliers and/or customers.